Show pageOld revisionsBacklinksBack to top This page is read only. You can view the source, but not change it. Ask your administrator if you think this is wrong. ======Short-Term Capital Loss====== A Short-Term Capital Loss is the financial hit you take when you sell a [[Capital Asset]] for less than you paid for it, provided you owned the asset for **one year or less**. Think of it as the unfortunate sibling of a [[Short-Term Capital Gain]]. A capital asset is typically an investment like a stock, bond, or piece of real estate. The price you paid for it, including any commissions or fees, is known as your [[Cost Basis]]. So, if you buy shares of a company and sell them ten months later at a lower price, the difference is your short-term capital loss. While nobody enjoys losing money, this type of loss has a silver lining, particularly when tax season rolls around. It's a key concept in managing your investment portfolio's tax efficiency, and understanding it can turn a market misstep into a valuable financial tool. ===== Why It Matters (Especially for Your Taxes) ===== A short-term capital loss isn't just a number on your brokerage statement; it's a powerful tool for reducing your tax bill. Tax authorities, like the IRS in the United States, allow you to use these losses to offset your gains, potentially saving you a significant amount of money. This strategy is often called [[Tax-Loss Harvesting]]. ==== The Loss Offset Hierarchy ==== When you have a short-term capital loss, the tax code dictates a specific order for its use. Think of it as a waterfall, where the loss flows down to offset different types of income. - **Step 1: Offset Short-Term Capital Gains.** Your short-term losses are first used to cancel out your short-term capital gains. Since these gains are taxed at your higher [[Ordinary Income]] tax rate, this is the most valuable use of the loss. For example, a $2,000 loss will completely wipe out a $2,000 short-term gain, leaving you with a net gain of $0 for tax purposes. - **Step 2: Offset Long-Term Capital Gains.** If you have more short-term losses than short-term gains, the excess loss can then be used to offset your [[Long-Term Capital Gain]]. This is still beneficial, though slightly less so, as long-term gains are typically taxed at a lower rate. - **Step 3: Offset Ordinary Income.** Still have losses left over? You can use up to $3,000 of that remaining loss per year ($1,500 if married filing separately) to reduce your regular taxable income, such as your salary. - **Step 4: Carry It Forward.** If your net capital loss for the year exceeds the $3,000 income offset limit, don't worry—it's not gone forever. The remaining amount can be carried forward to future tax years. This is known as a [[Capital Loss Carryover]], and you can use it to offset gains or income in the years ahead until the loss is fully used up. ===== A Value Investor's Perspective ===== For a value investor, a short-term capital loss is more than just a tax break; it’s a moment for reflection. The goal of value investing is to buy wonderful companies at fair prices and hold them for the long term, making short-term trading a rare activity. ==== Loss as a Teacher, Not a Tragedy ==== Selling a stock after less than a year often signifies that the original investment thesis was flawed or that a mistake was made. Did you get caught up in market hype? Was your analysis rushed? Did you fail to demand a sufficient [[Margin of Safety]]? Use the loss as a tuition payment to the "School of Mr. Market." Analyze what went wrong, learn from the error, and refine your investment process to avoid repeating it. A loss can be your most valuable teacher if you let it. ==== Avoiding the "Wash Sale" Trap ==== If you're selling a stock to realize a loss for tax purposes, you must be aware of the [[Wash Sale Rule]]. This rule prevents you from claiming a tax loss if you buy the same or a "substantially identical" security within 30 days //before or after// the sale. The purpose is to stop investors from selling a stock to capture a tax benefit, only to immediately buy it back and maintain their position. If you trigger a wash sale, the loss is disallowed for the current year and is instead added to the cost basis of the newly purchased shares, delaying the tax benefit. ===== A Quick Example ===== Let's put it all together. * **January:** You buy 50 shares of Company A for $100 per share. Total Cost Basis = 50 x $100 = $5,000. * **July:** You buy 10 shares of Company B for $200 per share. Total Cost Basis = 10 x $200 = $2,000. * **November:** Things haven't gone as planned. You sell all your Company A shares for $80 each (Total Proceeds = $4,000). You also sell all your Company B shares for $350 each (Total Proceeds = $3,500). Let's calculate the outcome: * **Company A:** You have a **$1,000 short-term capital loss** ($4,000 proceeds - $5,000 cost basis). * **Company B:** You have a **$1,500 short-term capital gain** ($3,500 proceeds - $2,000 cost basis). For tax purposes, you can use your $1,000 loss from Company A to offset the gain from Company B. //Net Short-Term Capital Gain = $1,500 (gain) - $1,000 (loss) = $500// Instead of paying tax on a $1,500 gain, you only have to pay tax on a **$500 gain**. That's the power of putting your losses to work!